Want to drive your auditors crazy? Try this: First, meet with them ahead of the annual audit and agree on a date when your work papers will be ready. Then, when they arrive for the audit, tell them you’re “almost ready” and hand over just enough material to keep them busy until lunch. Repeat as necessary. Later, suddenly remember a contract or revenue-recognition problem that you haven’t previously discussed (the more complex, the better). Finally, as the deadline nears, demand a 24-hour turnaround for the 10-K draft and complain loudly when the auditors tell you it can’t be done.
This scenario may sound like a joke, but in fact auditors say it’s exactly what many CFOs do every year. Michael Deutchman, managing director at Los Angeles–based accounting firm Kabani & Co., says he dreams of walking into a client company where “we can test the records and see right away that they are what they’re supposed to be.”
But in reality, he laments, “there aren’t a lot of CFOs who run companies that way.” More often, says Ben Neuhausen, national director of accounting for BDO Seidman, “the client takes forever to pull together documentation, and then they present it three days before audited financials are due to their lender, or a week before the 10-K has to be written. Somehow they think the auditor will work a miracle.”
The miracle is that despite the chronic unreadiness of auditees, the relationship between auditors and their clients is actually improving. Most auditors — more than 60 percent of those recently surveyed by CFO — say they have a better relationship with clients today compared with three years ago, when the pain of Sarbanes-Oxley compliance was still raw. In part that’s due to new interpretations from the Securities and Exchange Commission that loosen the strictures of Sarbox, leading most auditors to feel they can offer more guidance — “the fun stuff,” in the words of one senior manager. New guidance about how internal controls must be audited, in the form of Auditing Standard No. 5 (AS5) from the Public Company Accounting Oversight Board (PCAOB), has also made things better.
Still, ask auditors what keeps them awake at night and client-related issues will top their replies. More than half the nearly 100 auditors surveyed by CFO said that unprepared clients create high levels of stress. One-third said the same of clients who are difficult to work with. The hassle from clients, in fact, far outranked other strains, such as the pressure to generate more revenue.
No one expects a return to the cozy pre-Sarbox days, when auditors were practically an extension of the finance team. But, auditors wouldn’t mind a little more cooperation and appreciation. “The ideal situation would be clients who understand their own accounting and make the time to get us what we need,” says Bruce Rosen, partner-in-charge of assurance services at New York–based auditing firm Eisner. How often does that happen? By way of reply, Rosen laughs — and laughs some more.